Accounting Standard 6 and 18

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Accounting Standard (AS) 16
(issued 2000)

Borrowing Costs

(This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards1.) The following is the text of Accounting Standard (AS) 16, ‘Borrowing Costs’, issued by the Council of the Institute of Chartered Accountants of India. This Standard comes into effect in respect of accounting periods commencing on or after 1-4-2000 and is mandatory in nature.2 Paragraph 9.2 and paragraph 20 (except the first sentence) of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, stand withdrawn from this date. Objective

The objective of this Statement is to prescribe the accounting treatment for borrowing costs. Scope
1. This Statement should be applied in accounting for borrowing costs. 2. This Statement does not deal with the actual or imputed cost of owners’ equity, including preference share capital not classified as a liability. Definitions

3. The following terms are used in this Statement with the meanings specified: Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period of time3 to get ready for its intended use or sale. 4. Borrowing costs may include:

(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; (b) amortization of discounts or premiums relating to borrowings; (c) amortization of ancillary costs incurred in connection with the arrangement of borrowings; (d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and (e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs .

5. Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets.


6. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. The amount of borrowing costs eligible for capitalization should be determined in accordance with this Statement. Other borrowing costs should be recognized as an expense in the period in which they are incurred. 7. Borrowing costs are capitalized as part of the cost of a qualifying asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. Other borrowing costs are recognized as an expense in the period in which they are incurred.

Borrowing Costs Eligible for Capitalization
8. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an...
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